Chapter 6

PUBLIC SERVICE ACT

Definition of Public Utility
Public Utility is a business or service engaged in regularly supplying the
public with some commodity or service of public consequence such as
electricity, gas, water, transportation, telephone or telegraph service. Apart
from statutes which define the public utilities that are within the purview of
such statutes, it would be difficult to construct a definition of a public utility
which would fit every conceivable place. As its name indicates, however, the
term public utility implies public use and service to the public.
Albano vs. Reyes G.R. 83551, July 11, 1989
175 SCRA 264 | Paras, J.
Facts:
The Philippine Ports Authority (PPA) board directed the PPA management to prepare for the
public bidding of the development, management and operation of the Manila International
Container Terminal (MICT) at the Port of Manila. A Bidding Committee was formed by the DOTC
for the public bidding. After evaluation of several bids, the Bidding Committee recommended the
award of the contract to respondent International Container Terminal Services, Inc. (ICTSI).
Accordingly, Rainerio Reyes, then DOTC secretary, declared the ICTSI consortium as the
winning bidder.
On May 18, 1988, the President of the Philippines approved the same with directives that PPA
shall still have the responsibility for planning, detailed engineering, construction, expansion,
rehabilitation and capital dredging of the port, as well as the determination of how the revenues
of the port system shall be allocated for future works; and the contractor shall not collect taxes
and duties except that in the case of wharfage or tonnage dues.
Petitioner Albano, as taxpayer and Congressman, assailed the legality of the award and claimed
that since the MICT is a public utility, it needs a legislative franchise before it can legally operate
as a public utility.
ISSUE: Whether a franchise is needed for the operation of the MICT?
Held: No. While the PPA has been tasked under E.O. No. 30 with the management and
operation of the MICT and to undertake the provision of cargo handling and port related services
thereat, the law provides that such shall be in accordance with P.D. 857 and other applicable
laws and regulations. P.D. 857 expressly empowers the PPA to provide services within Port
Districts whether on its own, by contract, or otherwise.
Even if the MICT is considered a public utility, its operation would not necessarily need a
franchise from the legislature because the law has granted certain administrative agencies the
power to grant licenses for or to authorize the operation of public utilities. Reading E.O. 30 and
P.D. 857 together, it is clear that the lawmaker has empowered the PPA to undertake by itself the
operation and management of the MICP or to authorize its operation and management by
another by contract or other means, at its option.
Doctrine: The law granted certain administrative agencies the power to grant licenses for the
operation of public utilities. Theory that MICT is a wharf or a dock, as contemplated under the
Public Service Act, would not necessarily call for a franchise from the Legislative Branch.

What is a public Service?

Every person that may own, operate, manage, control in the Philippines, for
hire/compensation, with general/limited clientele whether permanent, occasional or
accidental, and done for general business purposes, any common carrier, railroad,
street railway, traction railway, subway motor vehicle, steamboat, or steamship
line, ferries and watercraft, shipyard, ice-plant, electric light, heat and power or any
other public utility.

Necessity for Public Convenience

A certificate of public convenience (CPC) is an authorization granted by
the LTFRB for the operation of land transportation services for public use as
required by law.
KILUSANG MAYO UNO LABOR CENTER vs.HON. JESUS B. GARCIA, JR., the LAND
TRANSPORTATION FRANCHISING AND REGULATORY BOARD, and the PROVINCIAL BUS
OPERATORS ASSOCIATION OF THE PHILIPPINES G.R. No. 115381 December 23, 1994
FACTS:
Then Secretary of DOTC, Oscar M. Orbos, issued Memorandum Circular No. 90-395 to then
LTFRB Chairman, Remedios A.S. Fernando allowing provincial bus operators to charge
passengers rates within a range of 15% above and 15% below the LTFRB official rate for a period
of one (1) year.
This range was later increased by LTFRB thru a Memorandum Circular No. 92-009 providing,
among others, that "The existing authorized fare range system of plus or minus 15 per cent for
provincial buses and jeepneys shall be widened to 20% and -25% limit in 1994 with the authorized
fare to be replaced by an indicative or reference rate as the basis for the expanded fare range."
Sometime in March, 1994, private respondent PBOAP, availing itself of the deregulation policy of
the DOTC allowing provincial bus operators to collect plus 20% and minus 25% of the prescribed
fare without first having filed a petition for the purpose and without the benefit of a public hearing,
announced a fare increase of twenty (20%) percent of the existing fares.
On March 16, 1994, petitioner KMU filed a petition before the LTFRB opposing the upward
adjustment of bus fares, which the LTFRB dismissed for lack of merit.
ISSUE:
Whether or not the authority given by respondent LTFRB to provincial bus operators to set a fare
range of plus or minus fifteen (15%) percent, later increased to plus twenty (20%) and minus
twenty-five (-25%) percent, over and above the existing authorized fare without having to file a
petition for the purpose, is unconstitutional, invalid and illegal.
HELD:
Yes.
xxx
Under section 16(c) of the Public Service Act, the Legislature delegated to the defunct Public
Service Commission the power of fixing the rates of public services. Respondent LTFRB, the
existing regulatory body today, is likewise vested with the same under Executive Order No. 202
dated June 19, 1987. x x x However, nowhere under the aforesaid provisions of law are the
regulatory bodies, the PSC and LTFRB alike, authorized to delegate that power to a common
carrier, a transport operator, or other public service.

Requisites for Certificate Public Convenience

Pursuant to Section 16(a) of the Public Service Act, as amended, the
following requirements must be met before a CPC may be granted.
What are the requirements for the grant of certificate of public convenience?
1. Applicant must be a citizen of the Philippines. If the applicant is a
Corporation, 60% of its capital must be owned by Filipinos
2. Applicant must have sufficient financial capability to undertake
proposed services and meeting responsibilities incidental to its
operation. (Kilusang Mayo Uno v. Garcia G.R. No. 108584, Dec. 22,
1994)
3. Applicant must prove the operation of proposed public service will
promote public interest in a proper and suitable manner; and
4. Applicant must prove public necessity
History
The 20th century ushered in the birth and growth of public utility regulation in
the country. Americans introduced public utility regulation at the turn of the
century, various regulatory bodies were created.

Coastwise Rate Commission under Act No. 520 passed by the

Philippine Commission on November 17, 1902
Board of the Rate Regulation under Act No. 1779 dated October 12,
1907
Board of Public Utility Commission under Act No. 2307 dated December
19, 1913
Public Utility Commission under Act No. 3108 dated March 19, 1923
Commonwealth period, the National Assembly passed a more
comprehensive public utility law. This was Commonwealth Act No. 146,
as amended or the Public Service Act as amended. Said law created
Regulatory and Franchising body known as the Public Service
Commission (PSC).
Public Service Commission (PSC) existed for thirty-six (36) years from
1936-1972
Presidential Decree No. 1 was issued on September 24, 1972 and
declared as part of the law of the land. PSC was abolished and replaced
by three (3) specialized regulatory boards:
a. Board of Transportation
b. Board of Communication
c. Board of Power and Waterworks
Board of Transportation (BOT) lasted for 13 years and abolished on
March 20, 1985 thru Executive Order No. 1011 was issued abolishing
the Board of Transportation and the Bureau of Land Transportation.
Their powers and functions were merged into the Land Transportation
Commission (LTC).
After 2 years, LTC was abolished by Executive Order No. 125 dated
January 30, 1987 and 125-A dated April 13, 1987 which reorganized
the Department of Transportation and Communications.
June 19, 1987 Land Transportation Franchising and Regulatory Board
(LTFRB) and created by EO 202.
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LTFRB is the existing franchising and regulatory body for overland

transportation

The regulatory land transportation dates back to the early 1900s. The LTFRB
therefore, is a product of a series of transformations. The evolutionary
progression runs as thus:

Coastwise Rate Commission - November 17, 1902

Supervising Railway Expert - June 29, 1906

Board of Public Utility Commissioners - December 19, 1913

Public Utilities Commission - March 9, 1917

Public Service Commission - 1926

Specialized Regulatory Boards - 1972

Board of Transportation - 1979

Land Transportation Commission (BOT & BLT) - 1985

Land Transportation Franchising & Regulatory Board - 1987

LAND TRANSPORTATION FRANCHISING AND REGULATORY BOARD

The powers of the LTFRB as provided for in EO No. 202 are:

prescribe and regulate routes of service provided by motorized vehicles in
accordance with the public land transportation development plans and
programs
approved
by
the
department
of
Transportation
and
Communications.
issue, amend, revise, suspend or cancel Certificates of Public Convenience
determine, prescribe and approve and periodically review and adjust,
reasonable fares, rates and other related charges.
etc.
Policies that may be used by the administrative body concerned in
determining who among the number of applicants is entitled to a certificate,
aside from public interest, convenience and necessity as controlling factor:
(a) Prior operator rule protection of the first licensee's investment not to be
subjected to ruinous competition.
(b) Prior applicant rule provides priority in the filing of application.
(c) Third operator rule just a variation of the prior operator rule; instead
of one prior operator, there are two prior operators who are rendering
sufficient service.
(d) Protection of investment rule related to prior operator rule, the law aims
not only to protect the public but the operators as well.
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Cite instances where a certificate of public convenience is not necessary?

1. Warehouses
2. Animal-drawn vehicles or banca powered by oar or by sail; tug boats and
lighters
3. Airships except as to fixing rates
4. Radio companies, except as to fixing of rates
5. Ice plants
6. Public market
7. Public utilities operated by the national government or political subdivision
except as to rates.
What are the grounds that oppositors may raise to the application
for a certificate of public convenience?
1. The area has already a well-established operator prior operator rule.
2. Interpose an objection stating that the grant of the application would
result to a ruinous competition.
3. Attack the citizenship of the applicant (Sec. 11, Art. XII of the 1987
Constitution prohibits the granting of franchise or certificate for the operation
of public utility in favor of non-Filipino citizens); or
4. The applicant does not have the necessary financial capacity.
Certificate of Public Convenience and Certificate of Convenience and
Public Necessity
Philippine Airlines, Inc. vs. Civil Aeronautics Board, 270 SCRA538, G.R. No. 119528 March
26, 1997
Facts: Grand Air applied for a Certificate of Public Convenience and Necessity with the Civil
Aeronautics Board (CAB). The Chief Hearing Officer issued a notice of hearing directing Grand
Air to serve a copy of the application and notice to all scheduled Philippine Domestic operators.
Grand Air filed its compliance and requested for a Temporary Operating Permit (TOP). PAL filed
an opposition to the application on the ground that the CAB had no jurisdiction to hear the
application until Grand Air first obtains a franchise to operate from Congress. The Chief Hearing
Officer denied the opposition and the CAB approved the issuance of the TOP for a period of 3
months. The opposition for the TOP was likewise denied. The CAB justified its assumption of
jurisdiction over Grand Airs application on the basis of Republic Act 776 which gives it the
specific power to issue any TOP or Certificate of Public Convenience and Necessity.
Issue: Whether or not the CAB can issue a Certificate of Public Convenience and Necessity or
TOP even though the prospective operator does not have a legislative franchise?
Held: Yes, as mentioned by the CAB, it is duly authorized to do so under Republic Act 776 and a
legislative franchise is not necessary before it may do so, since Congress has delegated the
authority to authorize the operation of domestic air transport services to the CAB, an
administrative agency. The delegation of such authority is not without limits since Congress had
set specific standard and limitations on how such authority should be exercised.
Public convenience and necessity exists when the proposed facility will meet a reasonable want
of the public and supply a need which the existing facilities do not adequately afford.
Thus, the Board should be allowed to continue hearing the application, since it has jurisdiction
over it provided that the applicant meets all the requirements of the law.

The terms Convenience and necessity, in conjunction with public

convenience in a certificate of authorization to a public service entity to
operate does not in any way modify the nature of such certification, or the
requirements for the issuance of the same. It is the law which determines the
requisites for the issuance of such certification, and not the titled indicating
the certificate.
The terms convenience and necessity are to be construed together
although they are not synonymous, and effect must be given both. The
convenience of the public must not be circumscribed by according to the
word necessity its strict meaning or an essential requisites.
Simply in view of this case, there is no more distinction between certificate of
public convenience and certificate of convenience and public necessity.

PRIOR OPERATING RULE

What is the prior operator rule?
Provides existing franchise operator preferential right within authorized
territory as long as said operator renders satisfactory and economical
service. This rule subordinates the prior applicant rule which gives first
applicant priority only if things and circumstances are equal. A prior operator
must be given the opportunity to extend its transportation services before
permitting a new operator to operate in the territory of said prior operator.
Or old Operator Rule which is to the effect that a public utility operator
should be shielded from ruinous competition by affording him the
opportunity to improve his equipment and service before allowing a new
operator to serve in the same territory he covers.
What are the exceptions of prior operator rule?
1. Great demand for public utility convenience of the public. The
resulting competition will undoubtedly benefit the public through
improvement in the service and reduction in retail prices.
2. Better serve the public interest what is important is whose operation
would best subserve the public interest.
3. Operator is not of good standing it should be emphasized that the
paramount consideration should always be the public interest and
public convenience. The duty of the commission to protect investment
of a public utility operator refers only to operators of good standing
those who comply with the laws, rules and regulations and not to
operators who are unconcerned with the public interest and whose
investments have failed or deteriorated because of their own fault.
4. Failure to increase the service
An old operator on the line in question, never the less he has not
applied for an increase in his service but allowed another to do so; and
according to the line of decisions, it has been ruled that the granting of
preference to an old operator applies only when said old operator has
made the offer to meet the increase in traffic and not when another
operator even a new one, has made the offer to serve the new line or
increased the service on said line;
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5. Certificate of public convenience granted is maiden franchise.

6. Reasonable and it is not harmful nor obnoxious to public service.
7. Free competition
What is the Prior Applicant Rule?
Applies to situations wherein two applicants are applying for a certificate of
public convenience over a given territory. Where both applicants are similarly
situated, the prior applicant shall have the certificate over the other.

What is the Third Operator Rule?

Where two operators are more than serving the public there is no reason to
permit a third operator to engage in competition with them. The fact that it is
only one trip and of little consequence is not sufficient reason to grant the
application. (Yangco v. Esteban, G.R. No. 38586, Aug. 18, 1933)

Protection of Investment Rule

What is the Protection of Investment Rule?
The law contemplates that the first licensee will be protected in his
investment and will not be subjected to a ruinous competition. So long as an
operator under a prior license complies with its terms and conditions and the
reasonable rules and regulations for its operation, and meets the reasonable
demands of the public, it will be protected rather than destroy its investment
by the granting of the second license to another person for the same thing
over the same route of travel. Note: The "prior operator" and "protection of
investment" rules cannot take precedence over the convenience of the
public. (Martires Ereno Co. v. Public Service Commission, G.R. No. L25962, Sept. 30, 1975)

Ruinous competition
Means that because of the competition, his income will be so reduced that it
will not give him an adequate return on his investment.

Fixing of Rates
The regulation of public utilities include the regulation of rates that they are
charging to the public. This aspect of regulation is in line with the policy of
the State to protect the public against arbitrary and excessive rates while
maintaining the efficiency and quality of services rendered.
A. Non-Delegation
The power to fix the rates of public utilities is a power that has been
delegated to the regulatory administrative agencies. As such, it cannot be
further delegated by the said administrative agencies.

 It should be noted, however, that EO no. 213 issued by the President of the
Republic of the Philippines on Nov. 28, 1994, instituted the deregulation of
domestic shipping rates.
B. Discrimination
Discrimination in the charging of rates is not allowed under existing law and
rules.
Standard in Fixing Rates
The only standard which the legislature is required to prescribe for the
guidance of the administrative authority is that the rate be reasonable and
just.
a. Factors to Consider
The Supreme Court ruled three major factors in determining the just and
reasonable rates to be charged by a public utility:
(a) Rate of Return computed only for the purpose of fixing the
allowable rates to be charged by a public utility.
(b) rate base
(c) the rate itself or the computed revenue to be earned based on the rate
of return and rate base

Unlawful Arrangements
1. Boundary System
2. Kabit System

Boundary System
What is the so-called boundary system?
Under this system the driver is engaged to drive the owner/operators unit
and pays the latter a fee commonly called boundary for the use of the unit.
Whatever he earned in excess of that amount is his income. (Paguio
Transport Corp. v. NLRC, G.R. No. 119500, Aug. 28, 1998)
What kind of relationship exists between the owner of the vehicle and the
driver under a "boundary system" arrangement?
The relationship between jeepney owners/operators on one hand and
jeepney drivers on the other under the boundary system is that of employeremployee and not of lessor-lessee. (Martinez v. NLRC, G.R. No. 117495,
May 29, 1997).
The features which characterize, the "boundary system" namely, the fact
that the driver does not receive a fixed wage but gets only the excess of the
amount of fares collected by him over the amount he pays to the jeepowner, and that the gasoline consumed by the jeep is for the account of the
driver are not sufficient to withdraw, the relationship between them from
that of the employer and employee. (National Labor Union v. Dinglasan,
G.R. No. L-14183, Nov. 4, 1993)

Kabit System
What is the reason behind the proscription against the kabit system?
The thrust of the law in enjoining the kabit system is not so much as to
penalize the parties but to identify the person upon whom responsibility may
be fixed in case of an accident with the end view of protecting the riding
public. The policy therefore loses its force if the public at large is not
deceived, much less involved. (Lim v. CA, G.R. No. 125817, Jan. 16,
2002)

LAND TRANSPORTATION OFFICE

The law that governs registration of motor vehicles in the
Philippines is republic Act No. 4136, otherwise known as the Land
Transportation and Traffic Code (as amended) which was enacted
on June 20, 1964. The Code provides that the Land Transportation
Commission shall control as far as they apply, the registration and
operation of motor vehicles and the licensing of owners, dealers,
conductors, drivers, and similar matters.
The main functions of LTO are:
1. inspection and registration of motor vehicles
2. Issuance of licenses and permits
3. enforcement of Land Transportation Rules and Regulations
4. adjudication of traffic cases

Registered Owner Rule

The rule in this jurisdiction is that the person who is the registered owner of a
vehicle is liable for any damage caused by the negligent operation of the
vehicle although the same was already sold or conveyed to another person
at the time of the accident.
The Registered owner is liable to the injured party subject to his right or
recourse against the transferee or the buyer.
Liability Of Registered Owner of Vehicle
It has been consistently ruled that the registered owner of any vehicle is
directly and primarily responsible to the public and third persons while it is
being operated. The rationale behind such doctrine was explained way back
in 1957 in Erezo vs. Jepte where it was said that the principle upon which this
doctrine is based is that in dealing with vehicles registered under the Public
Service Law, the public has the right to assume or presume that the
registered owner is the actual owner thereof, for it would be difficult for the
public to enforce the actions that they may have for injuries caused to them
by the vehicles being negligently operated if the public should be required to
prove who the actual owner is. How would the public or third persons know
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against whom to enforce their rights in case of subsequent transfers of the

vehicles? We do not imply by his doctrine, however, that the registered
owner may not recover whatever amount he had paid by virtue of his liability
to third persons from the person to whom he had actually sold, assigned or
conveyed the vehicle. (Villanueva vs. Domingo, et al., G.R. No. 144274,
September 20, 2004).

Registered owner is liable even if leased to another

Art. 2180 of the Civil Code, the negligence of the employee is presumed the
negligence of the employer, and the latter failed to exercise due diligence in
the selection of its employees.
May the registered owner of the vehicle be held liable for damages
suffered by a third person in the course of the operation of the
vehicle?
Yes. The registered owner of a public service vehicle is responsible for
damages that may arise from consequences incident to its operation or that
may be caused to any of the passengers therein (Gelisan v. Alday, G.R. No. L30212, Sept 30, 1987). Also, the liability of the registered owner of a public
service vehicle for damages arising from the tortious acts of the driver is
primary, direct, and joint and several or solidary with the driver. (Philtranco
Service Enterprises, Inc. v. CA, G.R. No. 120553)
Situation Registered owner not liable In a jeepney, Angela, a passenger, was injured because of the flammable
material brought by Antonette, another passenger. Antonette denied her
baggage to be inspected invoking her right to privacy. Should the jeepney
operator be held liable for damages?
No. The operator is not liable for damages. In overland transportation, the
common carrier is not bound nor empowered to make an examination on the
contents of packages or bags, particularly those handcarried by passengers.
(Nocum v. Laguna Tayabas Bus Company, G.R. No. L-23733, Oct. 31, 1969)

Registered owner is liable under Kabit System

The registered owner rule is applicable whenever the persons involved are
engaged in what is known as the Kabit System.
The Kabit System is an arrangement whereby a person who has been
granted a certificate of public convenience allows other persons who own
motor vehicles to operate them under his license, sometimes for a fee or
percentage of the earnings.
May the registered owner of the vehicle be allowed to prove that there is
already a transfer of ownership to another person under the kabit system?
No. One of the primary factors considered in the granting of a certificate of
public convenience for the business of public transportation is the financial
capacity of the holder of the license, so that liabilities arising from accidents
may be duly compensated. The kabit system renders illusory such purpose
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and, worse, may still be availed of by the grantee to escape civil liability
caused by a negligent use of a vehicle owned by another and operated under
his license. If a registered owner is allowed to escape liability by proving who
the supposed owner of the vehicle is, it would be easy for him to transfer the
subject vehicle to another who possesses no property with which to respond
financially for the damage done. (Lim v. CA, G.R. No. 125817, Jan. 16,
2002)

Registered owner not liable for stolen vehicle

Duavit vs. CA, Sarmiento & Catuar G.R. No. 82318 May 18, 1989
Facts:
Private respondents were on board a jeep when they met an accident with another jeep driven
by Sabiniano. This accident caused injuries to private respondents, thus they filed a case for
damages against driver Salbiniano and owner of the jeep Duavit. Duavit admits ownership of
the jeep but contends that he should not be held liable since Salbiniano is not his employee and
that the jeep was taken by Salbiniano without his (Duavit) consent.
Issue: Whether or not the owner of a private vehicle which figured in an accident can be held
liable as an employer when the said vehicle was neither driven by an employee of the owner
nor taken with his consent.
Held:
No, an owner of a vehicle cannot be held liable for an accident involving the said vehicle if the
same was driven without his consent or knowledge and by a person not employed by him.
To hold the petitioner liable for the accident caused by the negligence of Sabiniano who was
neither his driver nor employee would be absurd as it would be like holding liable the owner of a
stolen vehicle for an accident caused by the person who stole such vehicle.

Approval of Sale, encumbrance of lease of property

Transfer of Certificate
The law really requires the approval of the Public Service Commission in
order that a franchise, or any privilege pertaining thereto, may be sold or
leased without infringing the certificate issued to the grantee.
The Registered Owner Rule applies if the transfer of the franchise was not
approved by the regulating agency.
The Supreme Court sustained the cancellation of the certificate of public
convenience:
(1) where the holder is a mere dummy;
(2) where the operator ceased operations and placed his vehicles on storage;
and,
(3) where the operator totally abandoned the service.

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Is the approval by the Public Utility Commission of the sale,

encumbrance or lease of property is a condition precedent to the
validity of a contract?
No. While in the old law the sale without the approval of the Public Utility
Commission was declared null and void, under Commonwealth Act 146, the
new law, the sale may not only be negotiated but completed before said
approval. In other words, the approval by the Commission is not a condition
precedent to the validity of the contract. The approval is only necessary to
protect public interest (Darang vs. Belizar, G.R. No. L-19487, January
31, 1967).

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